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RBA makes May interest rate decision

Coronavirus Covid-19. Australia quarantine, 100 dollar banknote with medical mask. The concept of epidemic and protection against coronavrius.
Australia is struggling to get to the other side of coronavirus. Image: Getty

The Reserve Bank of Australia (RBA) has kept rates on hold at its record low of 0.25 per cent as Australia continues to battle with coronavirus’ impact on the economy.

The decision comes amid fresh figures from the Australian Bureau of Statistics showing nearly 1 million Australians lost their job between mid-March and mid-April and concerns that unemployment could more than double.

And according to experts, today’s decision is one that will be repeated for years to come.

“The cash rate is as low as it's going to go, and the next move in rates will be up but it's at least three years away, probably more,” AMP Capital chief economist Shane Oliver told the Finder cash rate survey.

“Based on the experience of other countries, there is no value in taking rates negative. So any further easing in monetary policy will have to come from quantitative easing. In the meantime the coronavirus related shutdown will cause a big hit to growth that will take years to fully recover from.”

Economist Saul Eslake from the Corinna Economic Advisory agreed.

“The RBA has explicitly indicated that it won't raise the cash rate until it has made progress towards full employment and inflation within the 2-3 per cent target band,” he said.

“I am sceptical of forecasts of a 'V-shaped' recovery from the current downturn, and think that the RBA will keep the cash rate at its current level for at least two years."

Federal Treasurer Josh Frydenberg on Tuesday said that for every extra week that the current restrictions remain in place, Australia loses around $4 billion in economic activity.

The multi-billion dollar loss per week is a “combination of a reduced workforce participation, reduced productivity, and reduced consumption”.

The majority of experts tipped today’s outcome, though Alison Booth from the Australian National University and Nicholas Frappell from ABC Bullion both flagged a cut.

Booth said the struggling economy needs extra support, while Frappell said that with effective cash rates around 0.15 per cent, “another reduction may just formalise the current effective rate scenario.”

‘A very difficult period’: RBA makes statement

RBA governor Philip Lowe said Australia is currently going through a “very difficult period”, but noted that global financial markets are operating more efficiently than they were at the peak of the crisis.

However, he warned that even in the RBA’s baseline scenario, unemployment is set to hit 10 per cent while productivity will also fall by that amount.

“There is considerable uncertainty about the outlook,” he said.

“Reflecting this uncertainty, the Board considered a range of scenarios at its meeting. In the baseline scenario, output falls by around 10 per cent over the first half of 2020 and by around 6 per cent over the year as a whole. This is followed by a bounce-back of 6 per cent next year.”

Continuing, Lowe said this outlook would likely have been worse if the government and business sector wasn’t as strong.

“There has been a substantial, coordinated and unprecedented fiscal and monetary response in Australia to the coronavirus. Without this response, the outlook would have been even more challenging. These policies are supporting the economy right now and will help when the recovery comes.”

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